- NYSE and NASDAQ Compensation Committee Adviser Independence Rules Effective July 1, 2013
- May 24, 2013 | Authors: Ali D. Fawaz; Joshua M. Miller
- Law Firm: Proskauer Rose LLP - New York Office
Publicly traded companies are reminded of the approaching deadline for compliance with certain of the SEC-approved final amendments of the NYSE and Nasdaq stock exchange listing rules governing compensation committee independence: By July 1, 2013, compensation committees must have the authority to retain and pay outside consultants, legal counsel and other advisers and the responsibility to consider certain independence factors before selecting such advisers.
NYSE companies will be required to include these authorities and responsibilities in their compensation committee charter by the July 1 deadline; however, Nasdaq companies may grant this authority by charter, resolution or other board action (subject to state corporate law) until the earlier of their first annual meeting after January 15, 2014 and October 31, 2014, when a formal compensation committee charter setting forth such authorities and responsibilities will first be required.
For a summary of and guidance on the Final Listed Company Rules as approved by the SEC, please refer to our Special Report, SEC Approves NYSE and NASDAQ Revised Listing Rules Regarding the Independence of Compensation Committees and Their Advisers dated March 2013 (http://www.proskauer.com/en-US/publications/newsletters/special-report-sec-approves-nyse-and-nasdaq-revised-listing-rules/).
Under the amended stock exchange listing rules, a compensation committee may retain or obtain the advice of a compensation consultant, outside legal counsel or other adviser; is directly responsible for the appointment, compensation and oversight of the work of any such adviser retained by the compensation committee; and must be provided appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to such advisers. However, before a listed company’s compensation committee may retain such advisers or obtain their advice, it must consider the following six independence factors:
- whether the adviser’s employer provides other services to the listed company;
- the amount of fees the adviser’s employer receives from the listed company (as a percentage of such employer’s total revenue);
- the conflict of interest policies and procedures of the adviser’s employer;
- any business or personal relationship between the adviser and a member of the compensation committee;
- any stock of the listed company owned by the adviser; and
- any business or personal relationship between the adviser or the adviser’s employer with an executive officer of the listed company.
Nasdaq’s final rules require compensation committees to consider only these six factors prior to selecting advisers. By contrast, NYSE’s rules require that compensation committees take into consideration these six factors as well as “all factors relevant to that person’s independence from management.”
In any case, compensation consultants, outside legal counsel and other advisers are not required to satisfy the “independence” criteria; the adviser independence rules only require that the compensation committee consider independence of their advisers before retaining or receiving advice from them.
Notably, the Compensation committee adviser independence assessment does not have to be conducted with respect to:
- advice from in-house legal counsel;
- advice from advisers whose role is limited to consulting on broad-based plans generally available to all salaried employees on an non-discriminatory basis; or
- information that is not customized for the company or that is customized based on parameters not developed by the consultant and as to which the consultant does not provide advice.
SEC staffers have indicated that with respect to the determination of what it means to “provide advice” to the compensation committee, a facts and circumstances test applies. Nevertheless, particularly because of the potential broad scope of what “providing advice” means, at the outset of retaining and seeking advice from outside counsel, consultants and other advisers whose advice might be provided directly to, or otherwise influence the advice given to, the compensation committee, we recommend that in-house legal counsel solicit the requisite information necessary to enable the compensation committee to assess the independence of any outside counsel or other advisers before any such advice is provided to the compensation committee.